Better Inventory

Management
Big Challenges, Big Data, Emerging Solutions

.............................................Table of Contents The Challenge............................................................................ 5 Making Better Use of Big Data.............................................................................. 8 References.................................................................................................. 7 Conclusion.................................................................................................................. 7 Management.......................................................................... 4 Physical......................................................................................................................................................................................... 4 Optimization................................................................................................................................................................................................................................................................................................................................... 6 Analysis.................................................................................................................... 4 Planning ...................... 7 Optimized Inventory Levels Based Upon Better Decisions............................................................. 6 Forecasting.................................................................................................................................... 9 2 Better Inventory Management ......................................................... 6 Analyzing and Forecasting Tools Gain Strength ...................................................................................................................... 3 A Multifunctional Process..................................................

The effectiveness of inventory control is typically measured by how successful a company is at reducing inventory investment. On paper. And most importantly. inventory control and management still fundamentally amounts to walking a fine line between meeting customer needs and stocking the least amount of inventory possible. and high-traffic sales volume for some items and sporadic or seasonal sales traffic for others necessitate the institution of a mixed approach to item-by-item stocking levels. Unfortunately. Conversely. because sitting on stock ties up cash flow. On the demand side. the overall economic environment. unsteady supplier performance. the concept of inventory management seems easy enough. difficulties stem from unpredictability. again increasing inventory. supply chain disruptions. it’s important to stock enough of it to avoid paying the opportunity costs of lost sales and diminished 3 Better Inventory Management . inventory management is much more complex in practice. The purchasing department achieves volume discounts on large batch and off-season purchases. scarcity of materials. and shrinkage contribute to the need to establish buffer stocking levels to provide safety days of lead-time supply. some parts of a business seek to increase inventory and other parts to decrease it. Production wants all parts and raw materials to be available to keep line efficiency high and run large batch sizes. In the case of supply and demand. and 2) the tentative nature of both supply and demand. it can be summed up as the process of determining what items to stock. For distributors and manufacturers. In simple terms. Because inventory is the lifeblood of the sales and production processes. and achieving maximum throughput and cost containment. and this increases inventory. and when orders should be placed for more. the perishability and obsolescence of products. meeting its customer service goals. The factors that complicate the process fall into two broad categories: 1) conflicting objectives across various segments of each company. Yet with all of these complications to consider. In the case of conflicting objectives. product developers and finance department trend watchers often want to keep inventory low to advance the roll-out of new products. because the sales department prioritizes the delivery of products in the best time frame to satisfy customer demand. new products and innovations. Each part of the company has the same goal—better profitability—but differing viewpoints on how to get there.The Challenge Because inventory is usually one of the biggest numbers on their balance sheet. effective inventory control and management is a vital function to help insure the continued success of distribution and manufacturing and companies. they encourage the business to keep finished goods stocks high. For example. the above factors are complicated further when hundreds of thousands of finished goods for sale or thousands of parts for assembly are warehoused across multiple locations. how many of each item should be kept on hand. For instance. senior management wants to decrease inventory.

just-in-time (JIT) environment. this component of inventory management is virtually ongoing. To further assure and enhance accuracy. and overall physical control of inventories. Inventory planning and ordering relies upon various methodologies that in turn depend upon varying rates of demand. A Multifunctional Process Any discussion of better inventory control and management practices begins with an overview of the process. For example. inventory specialists follow a strict schedule of cycle counting or perpetual physical inventory (PPI). In mid-market and larger companies. stocking. inventory planning emphasizes systematic management. and kit repackaging are notable aspects of physical inventory control. But because inventory is expensive. Unsurprisingly. it’s important to stock leaner quantities of it to avoid paying carrying costs like taxes.customer satisfaction and loyalty. 4 Better Inventory Management . and storage and to avoid paying the opportunity cost of unavailable working capital. Thus companies commonly utilize material requirements planning (MRP) in high sales volume scenarios or kanban in a lean. PPI provides information on the effectiveness of control practices over time. and 42% cited improving customer service levels as a top priority. It helps to remember that effective inventory control and management is rooted in three distinct but interconnected processes. movement. insurance. inventory is generally one of the biggest assets on a company balance sheet. Planning Whereas physical inventory emphasizes control and movement. recent research strongly suggests that inventory management is an area where distributors and manufacturers are aggressively targeting improvement. Accurate and timely inventory data collection is an imperative. consigning. security. Physical Physical inventory control is a term that describes the receiving. Another daily responsibility of physical control is data entry. allowing targets to be set. Barcoding stock keeping units (SKUs). in a 2012 survey of supply chain professionals conducted by the Aberdeen Research Group. adjusted and monitored. This manual intervention serves to check and verify that the computerized data records for quantity and location match the physical stock. 60% of respondents cited reducing inventory costs as a top priority. All items that enter or leave the inventory system must be tracked in the company’s ERP system and all paperwork pertaining to these movements should be filled out daily as well. To repeat. with shipments arriving and departing many times each day.

and shipping and receiving. stock-outs and stock overages happen. Optimization Nonetheless. For instance. Obviously.Briefly. stem from a mismatch between the stock a company has on hand and the actual demand for it. The frequent occurrence of stock-outs and stock overages indicate that inventory levels have not been optimized. They’re designed to better classify stocking levels (buffer. Significantly. thereby putting the predetermined management objectives—again. systematic. and cost containment—well within reach. 5 Better Inventory Management . The interplay of this information through an ERP system undergirds greater efficiency. Stock-outs and stock overages. finance. companies that sell or assemble only one or two particularly large items per year don’t need to have those expensive items (or the parts the items are composed of) sitting around waiting for a buyer. and the accuracy of the data is driven by conscientious data entry. possibly production. preplanned approaches to replenishing inventory involve information relevant to sales. while also avoiding trapping working capital in overages of pricey stock. measurable reductions in inventory investment. Enter the inventory optimization system. and improve demand forecasting going forward. Whether stock is ordered for regular arrival by the truckload or by irregular special deliveries. in both high.and low-volume situations. augment supplier management based upon past supplier performance. However. purchasing. the advent of new inventory optimization technology holds the promise of reducing those mismatches significantly by forecasting demand more accurately and with much greater speed. overage) based upon an analysis of past demand. despite the best efforts to effectively plan inventory ordering. The statistics describing the top priorities of inventory specialists cited above illustrate that fact. inventory specialists cannot eliminate those mismatches entirely. after all. replenishment. Right-sizing means avoiding stock-outs and lost sales of high-demand items. MRP systems facilitate the right-sizing of inventory that gets turned over reliably and replenished frequently. JIT systems base purchases of new stock upon customer demand as it happens bit by bit. maximized throughput. These emerging technologies are the supply chain management mechanism used to mathematically calculate where and when inventory should be deployed to satisfy predetermined management objectives. The latter function has the greatest ramifications for optimizing inventory levels. data drives the stocking of inventory. increased customer satisfaction.

the complex organizational needs and the fluctuations of supply and demand. Recall. As alluded to above. thousands of global supply chains. for example. Most ERP systems make it possible to produce reports using each dataset complete with helpful charts designed to compare results against industry wide key performance indicators over time. ERP solutions have also provided new and improved ways to manipulate the data within customized financial reports that offer the potential for deep insight into customer behavior. Analyzing and Forecasting Tools Gain Strength Take. purchasing. ERP systems house plenty of data related to inventory. Still. Internet. The concept has always been about the ability of a company to use the massive amounts of data generated to become more agile and responsive—and ERP systems have advanced steadily to help them do that. but most of them do little beyond tracking the amounts of inventory on hand and alerting management about levels that are running low. and far-flung warehouses. longitudinal sales. supplier. the best such optimization systems provide a graphical interface capable of illustrating a synthesis of the data from 6 Better Inventory Management . mobile. Employing proprietary algorithms. the size of the ever-accumulating datasets consistently outpaced the ability of technology to realize the full potential of the intelligence within all that data. For example. and software technologies have enabled businesses to amass and continuously expand gigantic datasets within their ERP systems. Then multiply the complexities over millions of SKUs. and production data. today’s technology is catching up with all that data and doing more with it. and fine-tune best practices and decision making based upon reports like these.Making Better Use of Big Data It’s well worth highlighting the fact that the new inventory optimization tools possess the capacities they do because recent technological developments have focused on improving the ways in which the power of big data is harnessed. Business managers resolve problems. and ways to change to more efficient business models. as the latest inventory optimization systems demonstrate. However. That data has been used to prepare tax returns and financial statements and improve productivity through information sharing within and outside of an enterprise to facilitate communication and collaboration between stakeholders. operational trends. build on successes. modern inventory optimization systems are engineered to exploit data generated from everywhere within an ERP system. Now recall the fine line that the inventory specialist walks: balancing having enough stock to meet customer demand with as little inventory as possible. Because so many factors have real and potential impacts on inventory levels. Analysis Integrating an inventory optimization tool with the existing ERP system allows inventory specialists to take the data analysis functionality much further. too. financial.

an optimization tool uses actionable intelligence. Optimized Inventory Levels Based Upon Better Decisions Ultimately. patterns of production line downtime.all five of the above departments. lost sales. replenishment schedules. For instance. some companies stock costly and/or perishable items. items that are moving slowly enough to warrant draw downs. when stock-outs and overages were likely to occur. and it can provide unit-level thresholds for automated ordering and replenishment. Forecasting An inventory optimization tool then uses this analysis of cross-functional big data to forecast demand more accurately and much faster than previously possible. unsellable items in need of disposal. economic 7 Better Inventory Management . and exception alerts are communicated cross-functionally and to stakeholders outside the organization. patterns of suboptimal and optimal performance by suppliers. . diagnose. and identify seasonal shifts in item-by-item demand. and more. automated orders. Furthermore. which are expensive to store and maintain. inventory optimization depends upon decisions made by inventory specialists and senior management based upon several considerations unique to their companies. excess orders. These factors would compel management to push their risk tolerance in the direction of avoiding stock-outs. concomitant periods of strained overall organizational cash flow . taking into account risks of stock-outs and overages and to provide inventory specialists with advance warnings about stock levels approaching numbers that are too high or too low. or sell to customers with limited alternatives to turn to. This enables the system to recommend optimal inventory levels for sales availability. Management The inventory optimization tool also makes recommendations about optimal restocking schedules. That means the capacity of the inventory management tool to adjust recommended stocking levels dependent upon variable risk tolerance comes into focus. A key feature of the system is its capacity to recognize exceptions and alert management when mitigation is necessitated. patterns for large customer orders. analysis of sales data may reveal that per unit profit far exceeds the investment in inventory. a disproportionate reliance upon repeat and/or particularly high-volume clients. patterns of price reductions and volume discounts from suppliers. Such a synthesis would analyze. And because the inventory optimization tool is integrated with an existing ERP system. Using sophisticated tools to make those decisions helps management more accurately balance the trade-offs between the costs of a stock-out versus the costs of overstocking. Conversely. . Thus. and thus having more inventory at the ready. or that each sale opens additional revenue streams. the recommended stock levels.

the emphases placed by senior management on cost control and customer satisfaction are driving the adoption of more sophisticated systems of inventory management. the ability of an inventory optimization tool to adjust forecasts based on “what-if” parameters is a huge plus to management. and market share. throughput. inventory managers can significantly impact overall competitiveness and profitability. These factors would push management to stock as little inventory as possible to avoid the storage costs. By utilizing new. a situation that certainly pertains in today’s competitive environment. stocking too much inventory and suboptimal customer service are very common. As it stands. flexible. product and service mixes. using the right techniques for sales forecasting and inventory management allows inventory specialists to monitor changes and initiate cross-functional responses to alerts when action needs to be taken.conditions may dictate that a company must generate working capital from every possible source. If a distributor has typically carried $60 million worth of inventory and utilized an inventory optimization tool to reduce that level of inventory by 5 percent while maintaining customer satisfaction. Again. that company has added $3 million of working capital to the balance sheet. and more refined tools that provide for dynamic optimization of inventories to maximize customer service. There are proven technologies that can help management project customer demand more accurately and calculate the optimal inventory levels needed to balance the benefits of meeting uniquely defined levels of customer service with the benefits of stocking as little inventory as possible. the responsibility of inventory management is to make better decisions that result in a better balance of trade-offs. resulting in savings for years. and fluctuating supply and demand matrices. When innovative and sophisticated tools become available to help them improve that balance.” In Conclusion Despite right-sizing inventory’s being a complex challenge. Some companies look to reduce inventory much further. while decreasing inventory investment and lowering costs. “The best supply organizations deploy sophisticated analytical tools to reduce inventory levels by 20 percent to 50 percent. As a result. Furthermore. This means they need to push multiple turns of high volume items and pull lean inventory of items that move less frequently and everything in between. yet often unnecessary. Of course the reality is that mid-market and larger distributors and manufacturers commonly stock a mix of inventory that falls into both rubrics with varying levels of overlap. depending on shifting goals influenced by events on the ground. According to a recent WSJ.com report. those tools can provide a large and ongoing return on investment. 8 Better Inventory Management . These emerging technologies take in big data to account for complex and vast networks of cross-disciplinary needs.

Aberdeen Group. Inventory Control: How Best-in-Class Stack Up on Customer Service While Optimizing Their Inventory. 2. Ten Ways to Improve Inventory Management. Francois Faelli. Pratap Mukharji. 4. Logistics Quarterly. Winter 2002. Distributors Put inventory Under the Microscope. Thierry Catfolis and Raymond Tsang. InventoryMatters. Modern Distribution Management. Matt Ball. (originally) December 2002—January 2003. March 2012. The First Steps to Inventory Management. Supply Chain Efficiency through Collaboration. MDM Staff Writers.References 1. 9 Better Inventory Management . 5. July 6. 2012. Sam Israelit. Witek Brzeski and Gail Broadbear. Geoff Relph.com. June 25. 3. Dale Ross and Jerry Forsythe. 2011. WSJ.com.

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